Why bear markets don’t always lead to recession

RECENTLY major equity market indices breached their bear-market levels (a fall of 20 per cent or more), which has deepened investors’ concerns that a recession is around the corner. However, we believe that bear markets do not always lead to a recession. Understanding the relationship between bear markets and recessions will help investors to separate short-term headwinds from long-term structural change. This will usher in new perspectives for global equity investors as we enter a new paradigm of lower market returns, less predictable inflation, and higher volatility.

4 lessons from bear markets

Before delving into an analysis of the relationship between bear markets and recessions, it is important to understand the main characteristics of bear markets. Taking the US experience and the S&P 500 as an example, there are four key takeaways that investors should bear in mind.

Firstly, bear markets are not unusual. Since 1928, there have been 26 bear markets in the S&P 500. Secondly, bear markets tend to be shorter than bull markets. The average length of a bear market is 289 days. With the S&P 500 having fallen 22 per cent as of June 14 , we are currently 161 days into this downturn, approximately half of the average time taken. Bull markets by comparison have averaged 991 days. Thirdly, S&P 500 has lost 36 per cent on average in a bear market since 1948. By contrast, S&P 500 has gained 114 per cent on average during a bull market.